Roper Technologies, Inc.
Q3 2022 Earnings Call Transcript

Published: 26 Oct 2022

[Operator:]

Good morning. The Roper Technologies Conference Call will now begin. Today's call is being recorded and all participants will be in listen-only mode. I would now like to turn the call over to Zack Moxcey, Vice President, Investor Relations. Please go ahead.

[Zack Moxcey:]

Good morning and thank you all for joining us as we discuss the third quarter financial results for Roper Technologies. Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer; Rob Crisci, Executive Vice President and Chief Financial Officer; Jason Conley, Vice President and Chief Accounting Officer; and Shannon O'Callaghan, Vice President of Finance. Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. We have prepared slides to accompany today's call, which are available through the webcast and are also available on our website. Now if you please turn to Page 2. We begin with our safe harbor statement. During the course of today's call, we will make forward-looking statements which are subject to risks and uncertainties as described on this page, in our press release and in our SEC filings. You should listen to today's call in the context of that information. And now please turn to Page 3. Unless otherwise noted, we will discuss our results and guidance on an adjusted non-GAAP and continuing operations basis. For the third quarter, the difference between our GAAP results and adjusted results consists of the following items

[Neil Hunn:]

Thanks, Zack, and good morning everyone. As we turn to Page 4, we'll walk through our usual agenda highlights for the most recent quarter followed by color commentary for each of our segments and ending with our increased outlook for the year. Let's go ahead and get started. Next slide please. As we turn to Page 5, the main takeaways for today's call are, first, we had another great quarter of operational and financial performance and we're further increasing our outlook for the year. Second, earlier this month, we acquired another leading niche software business, Frontline Education. Third, we continue to have substantial M&A firepower north of $4 billion. And fourth and perhaps the most important the new higher quality Roper portfolio is becoming increasingly more evident, and we've never been more excited about our future. As it relates to the operating and financial performance in the quarter, we're pleased that revenues grew 10% on an organic basis and that the strength was broad based across our three segments and that margin performance improved as well. Consistent with our commentary during the last several quarters, not only did we grow nicely in the quarter, but the quality of our underlying business also improved as we saw our software recurring revenue base grow 11% on an organic basis, more on Frontline in a moment. Based on the strength in Q3 and our expectations for Q4, we're increasing our organic growth outlook to north of 9% for the year. And for those reasons together with the addition of Frontline, we're increasing our full year DEPS guidance by $0.57 at the midpoint. And finally, we've been active in the M&A market. Over the last few months, we deployed just over $4 billion, $3.7 billion for Frontline and $300 million for two bolt-ons

[Rob Crisci:]

Thanks, Neil. Good morning everyone. Turn to Page 8 and covering our Q3 financial highlights. As a reminder, as Zack said, all financial results are on a continuing operations basis. Total revenue increased 10% to $1.35 billion. The FX headwind was $20 million or 1.6% and was offset by acquisition contributions. Notably, our mix of business has shifted meaningfully toward more domestic revenue post the announced majority sale of our industrial businesses. The U.S. now represents approximately 85% of our revenue helping to shield our results from the impacts of any currency fluctuations. Q3 organic revenue increased 10% with broad-based strength across each of our three reporting segments

[Neil Hunn:]

Thanks, Rob. Let's turn to Page 11 and walk through our 3Q highlights for our Application Software segment. Revenues here were $644 million, up 7% on an organic basis and EBITDA margins were 43.6%. Across this segment, we saw recurring revenue, which is about 75% of the revenue for this segment increased 8% in the quarter. This recurring revenue growth is enabled by strong customer retention and continued migration to our SaaS delivery models. Across this group of companies, the financial strength was broad and it's been quite consistent for several quarters running. As we highlight a few businesses, we'll start with Vertafore, who had another great quarter of bookings growth, revenue growth and margin performance. Vertafore continues to see success in their software solutions targeted to the PNC insurance market with particular strength in the enterprise class market segment. Across both Deltek and Aderant, we continue to see solid new customer adds and nice momentum and migration towards their SaaS solutions. Also in the quarter we acquired TIP Technologies for Deltek, a leading software provider servicing the GovCon manufacturing and QA market and viGlobal for Aderant, a leading human resources and recruiting software tool for global law firms. CBORD, our nutrition and access management software business had strength across both education and healthcare and end markets. CliniSys and Data Innovations continue to exhibit strong demand and operational strength. CliniSys continued its market share gains across Europe and DI continues to demonstrate product market fit by gaining share of wallet across large healthcare systems. Strata continues to be solid for us as evidenced by strong new customer adds, cross-selling and renewal activity. Finally, Frontline will be reported in this segment starting in Q4. Looking at the outlook for the final quarter of the year, we expect to see organic growth in the 6% to 8% area. Turning to Page 12. Revenues in the quarter for our Network Software segment were $347 million, up 10% on an organic basis and EBITDA margins were strong at 54.5%. The 10% organic growth in this segment is underpinned by 16% growth in recurring revenue. As we dig into business specific performance, our U.S. and Canadian freight matching businesses continue to be fantastic. The marketing conditions while slowing a touch on the carrier side of the network remained favorable, these businesses saw nice new customer adds and ARPU increases during the quarter. Moving to foundry, our software business that enables live-action filming and computer-generated graphics to be combined in a single frame – frame again demonstrated their financial strength. Net retention was very strong and ARR grew in the strong double digits again. Foundry's success is rooted in their fast-paced innovation capability and favorable long-term market conditions. Growth in our businesses that focus on alternate site healthcare was led by SHP and SoftWriters and importantly retention rates across each of these businesses remained extremely high. Finally, iTrade, our network food supply chain business and iPipeline, our life insurance SaaS business that tech enables the quoting and underwriting processes, each had solid customer additions, which helped drive strong ARR growth in the quarter. Turning to the outlook for the fourth quarter, we expect to see 8% to 10% organic growth for this segment. As we turn to Page 13, revenues in our tech-enabled products segment were $360 million, up 15% on an organic basis. EBITDA margins for this segment increased nicely to 37.2% in the quarter. It's very nice to see 15% organic growth in the quarter and easing supply chain challenges. While supply chain challenges remain, we experienced demonstrable easing conditions especially as it relates to chips and chipsets. We are cautiously optimistic conditions will continue to improve. Let's start with Neptune, which once again set records for orders and quarter end backlog. For a few quarters running, Neptune has been able to gain market share by successfully maintaining industry leading product lead times while simultaneously launching new products both in terms of cellular connectivity and static meter reading technology. To this end, Neptune continues to experience accelerating demand that are static meter solutions. Verathon was simply strong. They grew nicely in the quarter driven by momentum across all three components of their product portfolio

[Operator:]

Thank you. We will now go to our question-and-answer portion of the call. Today's first question comes from Deane Dray at RBC Capital Markets. Please go ahead.

[Deane Dray:]

Thank you. Good morning everyone.

[Neil Hunn:]

Hey, good morning Deane.

[Rob Crisci:]

Good morning Deane.

[Deane Dray:]

Hey, I know we're not seeing it in any of your reported numbers today with all this upside, but had there been any changes in customer behavior on the software side, given the uncertain macro, whether it's velocity of new contracts, orders, customer adds, anything kind of below the radar screen?

[Neil Hunn:]

Yes, Deane, nothing in a meaningful sustained manner. Right? So I think we attribute that first to the markets that we serve. Right? So think about customers in healthcare, education, insurance, food, government contracting, utilities I mean, the macro forces generally are lessened or less impactful in those end markets. ARRs, I think, they are up the double digits 10%. So that's always a leading indicator of the strength. But there is certainly quarter-to-quarter there can be some noise. And so last quarter we're looking at, for instance, PowerPlan minus off some softening, but that recovered this quarter. And so it's not to say there is not pockets of things we look at, but nothing in a sustained manner at this stage.

[Deane Dray:]

That's great to hear. And as a follow-up can you expand on this initiative to structurally improve the longer term organic growth rates of the businesses? And just so we're clear, part of your acquisition criteria has never been to buy the fastest top line growing companies because that just doesn't fit the kind of where you are looking for these unicorns that have high barriers to entry that private equity is not going to take public. So you've never been focused on the real, sexy top line growth, but what is the target when you say kind of long-term improvement in organic growth?

[Neil Hunn:]

Yes, I draw you back. This is the same thing we've been talking about since really over the last four or five years since we became COO and CEO and the team we have in place today. So, we historically – long history this – we've said this is a GDP plus a little bit grower, and as we've restructured the portfolio and as we've talked about here increased the expectation outlook for more organic out of existing portfolio, now it's mid-single digits certainly through cycle. And we are always looking to continue to improve that. We've talked at NASOM about the desire to improve the organic growth outlook through our governance system of our businesses, thinking about how to do strategy right, where to play and how to win, how to execute that strategy in a process in discipline manner, and then how to build team and talent to sort of use that as a long-term competitive advantage. We've been at this with the portfolio for three or four years, and we're starting to see some signs of improvement. So, we're encouraged, but it's an ongoing body of work that never ends.

[Operator:]

Thank you. And our next question today comes from Scott Davis at Melius Research. Please go ahead.

[Scott Davis:]

Hey, good morning guys.

[Neil Hunn:]

Hey, Scott.

[Rob Crisci:]

Good morning.

[Scott Davis:]

Great results as usual. It probably sounds like a broken record after kind of a decade of that. But I was hoping for a little bit of a play-by-play on frontline. Were there the same kind of number of people that showed up for the auction, was there less, was it a little less competitive, the same? Just a little bit of a play-by-play will be helpful.

[Neil Hunn:]

Sure. Appreciate the opportunity to talk about that. I'll tell you, you never have perfect information. And so this is using all of our inputs and reading the tea leaves to really understand what happened. In the process the seller here Thoma had some bespoke reasons they needed to get liquidity from an asset they chose this one. They happened to time it in the market where private equity bidders had a difficult time bidding because there was not, or has not been a private leverage loan market. And so in that result, the process was thinner competitively, meaningfully thinner competitively and that's why we believe we are able to get a very fair price for the asset. So the process dynamics were a little bit different. And just another example of sort of the patience and our commitment to investment grade leverage and the conservative posture of our financial policy enables us to sort of move nimbly when an opportunity presents itself.

[Scott Davis:]

Got you. That's helpful. And can you give us, just as a follow-up, just a little bit of sense of magnitude of price in your 10% growth number this quarter? Is it a third, a half, something that you can give us just a sense of what component that was?

[Neil Hunn:]

It's very difficult for us to sort of bifurcate volume and price. Keep in mind we're 75% software. Inside software the growth algorithm of every one of our software businesses, you would trip a little bit. There is price baked in every year to sort of offset – mostly if not all of attrite. When you're cross-selling and upselling it to the customer base that gives it to your net retention and you are adding new customers to get the total growth. And so pricing and value capture is just completely native to the inner workings of the pricing model inside a software. And it's not – and it would be generally consistent with the past. I mean, there may be a little bit more prices, labor has gone up in the software model. As it relates to the product businesses, our product businesses have done a fabulous job of essentially passing the cost increases through with the margin to our customers. As you know that lags a little bit. It showed up in margins this quarter in . That will continue to bleed out over the next several quarters as the backlog that was built early in the years is shipped. And so the teams have done a nice job with that.

[Operator:]

Thank you. And our next question today comes from Joe Giordano with Cowen. Please go ahead.

[Joe Giordano:]

Hey, good morning guys.

[Neil Hunn:]

Hey, good morning.

[Rob Crisci:]

Good morning.

[Joe Giordano:]

Hey, just to follow kind of on Deane's question, we are starting to see like at least announcements about layoffs at tech companies and these kind of things as their business starts to slow. Obviously the businesses you have very different. But if you were to start extrapolating those type of announcements down to permeate throughout the broader economy, like how do you like play that scenario with your businesses? Like, okay, we're seeing this and that means this much impact to some of these software businesses and here is what we do and here is how we kind of think about that. Like, kind of like run us through that playbook.

[Neil Hunn:]

Yes, so, it is company specific, right. So every company is going to adjust as their market demands. As a general matter as large tech employment softens I view that as a good thing for our business because it makes it easier for us to hire the labor and talent that we need to hire. Here is point one. Point two, is keep in mind what we do for our customers. Right? We are selling and delivering to them the thing they need to run their business. So we are mission-critical to what they do and our pricing model is vastly fixed subscription. So it's not volume or transaction based. So we should be relatively muted to sort of short cycle fluctuations and the macroeconomic indicators. And so a little bit better labor environment, I think, is unbalanced a good thing for us.

[Joe Giordano:]

And then as you think about going forward in M&A, just given where the stock is derated, we haven't been in a situation where some of the dealers you might look at or hire multiples than Roper itself. So, like how are you kind of thinking about actionability of certain things just given where the stock trades?

[Neil Hunn:]

We're always focused on improving both the scale and the quality of the enterprise. It's been 20 years, it will be the next 20 years and finding the best asset at the best prices we can find. And there is no difference in that going forward.

[Operator:]

Thank you. And our next question today comes from Christopher Glynn at Oppenheimer. Please go ahead.

[Christopher Glynn:]

Thanks. Good morning.

[Neil Hunn:]

Good morning.

[Christopher Glynn:]

Was curious on the NSS margin seem to step out a bit nicely very strong incrementals. I just want to kind of discuss if there is a mixed shift there that's kind of episodic or kind of sticky.

[Rob Crisci:]

Yes. Hey Chris, it's Rob. I don't think anything really to call out. I mean, we had really strong organic growth with these software businesses that comes through with great incremental. So I'm just looking back to the margins. Last year, I think, we ended last year at 54 in the fourth quarter we were 54.5 EBITDA here. So yes, no, I think, it was a nice quarter performance, probably similar for the fourth quarter in terms of EBITDA margin for the segment.

[Christopher Glynn:]

Okay. And thinking about frontline accretion, if we take the $175 million of EBITDA maybe that's $160 million EBITDA and then there's might be some net interest increase expected there. So just curious how to put that together.

[Rob Crisci:]

Yes, that's right. So for the fourth quarter we've got about $40 million of EBITDA in for Frontline. And there is about $24 million, excuse me, of incremental interest. If you look at where we were before to now, as I mentioned earlier, we did draw on the revolver and so we're paying the revolver interest for much of the fourth quarter than we're assuming that the industrial sale closes late in the quarter and then that interest expense would go away. So I think the math on that is about $0.12 of our sort of $0.57 guidance increase was Frontline.

[Jason Conley:]

Depreciation is about $7 million or $8 million a year.

[Rob Crisci:]

Yes. Thanks Jason.

[Operator:]

Thank you. And our next question today comes from Julian Mitchell of Barclays. Please go ahead.

[Julian Mitchell:]

Hi, good morning. Just wanted to circle back to Network Software in terms of the top line, because I think you've had now sort of six quarters consecutive of around double digit organic sales growth. And I was curious to what extent it's the same one or two businesses driving that consistently or is it kind of different horses pulling it along at different times and kind of the leadership is changing? And any thoughts on the next few quarters, which businesses you see driving the Network Software organic growth?

[Neil Hunn:]

Yes, sure. I'll take a crack at it and then ask Rob if he wants to correct or amplify anything I say. So it's been a pretty consistent set of performance across the various businesses. We've talked for many quarters about the strength of U.S. Canadian freight match, right? It's just been fantastic for us. It continues to be good. For the last two or three quarters, we've talked two quarters this quarter and last quarter we've talked about how – the rate of growth is slowing a little bit, but it's still very good. Even this quarter there was a strong number of new career ads, so we would expect that to sort of slow down a bit over the course of the next year. The other businesses, Foundry, SoftWriters, iTrade, SHPI pipeline are just solid performers that have been very consistent and generally don't have that macro sort of tailwind that the freight match businesses have had. So we wouldn't expect any meaningful change from those businesses. Anything you want to add or comment?

[Rob Crisci:]

No, I think that's fair.

[Julian Mitchell:]

Thank you. And then just on Technology Enabled Products, you have had issues like most manufacturers from cost inflation, from supply chain challenges for some time. Those are starting to ease it looks like. So maybe help us understand what you are assuming for the pace of those supply chain challenges easing? And then assuming you've got volume growth ahead, easier supply chain and inflation, what kind of operating leverage should we expect in the TEP segment, not so much next quarter, but let's say next 12 months?

[Neil Hunn:]

I'll take the first couple – excuse me, parts of that question around supply chain pacing and improvement and let Rob comment about the OP leverage or EBITDA leverage there. So, just to set the context for us the supply chain, we have been modestly gated from shipping in a one or two of the businesses for short periods of time but for the most part it's been about – we've been able to ship, but it's been about a higher component cost and expedited logistics in order to sort of both inbound and outbound the products. This quarter demonstrably supply chain especially around chips improved intra-quarter. We went into the quarter assuming it's going to be difficult and it meaningfully improved during the quarter. So it's our expectation that that part of supply chain element continues to ease Q4 and beyond. There's still a little bit of challenges around the certain components principally come out of China, think motors and things like that, that are still have longer lead times, but those appear to be abating as well. We don't assume that happens per se in Q4. As it relates to the price and sort of pushing that through, we talked about a little bit before the companies have been very good at taking price increases to offset the component price or cost increases, but it lags by a handful of – not a handful, a couple quarters between you take the order and when you deliver the order and that started showing up this quarter.

[Rob Crisci:]

Yes. I'll just add to that. There's great momentum here. Neptune has been performing really, really well. Neil talked about how they're – they're still seeing great orders and great backlog and great momentum and so that should – that should certainly carry forward. So with the supply chain issues easing as Neil mentioned, I mean, leverage here I think it was 50% EBITDA leverage in the quarter. We should be north of 40% leverage over the long-term as these businesses continue to grow strong organically and so that would tick-up the EBITDA margins a little bit in that segment.

[Operator:]

Thank you. And our next question today comes from Steve Tusa of J.P. Morgan. Please go ahead.

[Steve Tusa:]

Hey, good morning.

[Neil Hunn:]

Hey, good morning, Steve.

[Steve Tusa:]

Just on, ongoing back to the front line so if that adds like $0.12 in your, I think your sequential increase in earnings is I don't know, like $0.07 or something like that. Yes, what's the, I know it's only down modestly but maybe sometimes you have an increase in the fourth quarter. I think obviously seasonality has changed a bit, but anything else kind of moving around or is everything generally just kind of flat from 3Q to 4Q EPS?

[Rob Crisci:]

Yes. I think if you look at the guide the tap volume, revenue is a little lower fourth quarter versus third quarters. You mentioned some supply chain ease and some stuff shifted – shifted a little bit earlier. Other than that, I think you're right. I mean it's just – it's a much different portfolio, right? We don't have the seasonality with all the energy businesses with the big fourth quarter, that's just – that those businesses have been divested.

[Steve Tusa:]

Right. And then just for free cash flow can you just baseline us on fourth quarter or just for the year? What you guys would've, I know you don't guide but we're getting close to the end of the year; maybe you could just baseline us on what you expect for the fourth quarter and deferred revenue is actually pretty negative in the quarter what's going on there?

[Rob Crisci:]

Yes. So I mean, cash flow should be strong in the fourth quarter. Obviously, setting aside the fact that we're still making payments on the divestitures it's always our best working capital quarter on deferred revenue. In the fourth quarters when we get most of our renewals for the software businesses, that's usually the best quarter for that as well. So it's usually a very good working capital quarter. And then if you look forward we certainly don't guide cash flow, but we are really, really well positioned for great cash conversion next year as we get these cash tax payments behind us and now we have a portfolio with even better working capital characteristics, and so we feel great about our abilities to continue to compound cash flow moving forward.

[Operator:]

Thank you. And our next question today comes from Allison Poliniak with Wells Fargo. Please go ahead.

[Allison Poliniak:]

Hi, good morning.

[Neil Hunn:]

Yes. Good morning.

[Allison Poliniak:]

Just want to go back to the network software businesses and particularly easily, look you touched on freight matching and then iTradeNetwork both businesses, which I would've thought had pretty strong market share historically. Could you maybe talk to with the new customer ads, are those markets evolving for you or is it something that Roper is doing specifically to capture share in there? Just any thoughts.

[Neil Hunn:]

So yes, each one is different between the freight match, the North American DAT freight match business, and iTrade on what they're doing all their product and go-to-market strategy. Rather the DAT, I would – there's a lot that we could unpack and delighted to talk to you about this on a call down or a more longer form way but the short version is they've done a terrific job on both their freight match product and their analytics product and then creating product tiers based on the value the customer wants to sort of buy into. At DAT also something like 75% of the bookings today are through their e-commerce channel where three years ago or five years ago, it was zero. So they've really removed the barriers to do business with them and when you look at the ARPU increases like 70% of the ARPU increase has been because customers have elected to a higher package because there's been more value to sort of get from the network. So they've done a wonderful job that's bespoke and unique to DAT like it is for all 27 businesses that iTrade. The go-to-market motion there has been the – it's been mostly the same but this over the course of probably about a year-and-a-half ago, the company released a new product offering to enable the supplier part of the network to do easier trading with the buy side of the network is the simplest way I could describe it. So think of it as like a lighter weight supply chain management software tool for half of the network and it's just been – it's a very consistent booking, so over the last four or five quarters as it's been released.

[Allison Poliniak:]

Great, thanks. And then just as we think of that organic, recurring revenue in the software businesses that has been quite strong. Do we assume a similar level of the recurring revenue growth as we look to our Q4 numbers? Just any thoughts there?

[Neil Hunn:]

You want to comment?

[Rob Crisci:]

Yes.

[Neil Hunn:]

Q4 or recurring?

[Rob Crisci:]

Yes. Should be – should be similar that that we've seen. That the trends there continue to be very positive overall on recurring revenue for sure.

[Operator:]

Thank you. And our next question today comes from Joe Ritchie at Goldman Sachs. Please go ahead.

[Joe Ritchie:]

Thanks. Good morning everyone.

[Neil Hunn:]

Hey Joe.

[Joe Ritchie:]

So guys, at the beginning a bunch of questions on the, just a long-term growth rates for your businesses and clearly like the portfolios evolved a lot over time and I think last quarter we talked about 6% long-term growth. I was just wondering as you kind of look at the 27 companies that now make up broker; are there businesses that you expect to grow, let's call it high-single, the low-double digits over time because of where they are in their maturity? And if there are, could you maybe just talk through some of those?

[Rob Crisci:]

Yes. I think the place to start right is the removal of the cyclicality, right? So if you look at where Roper is now is as we mentioned earlier, it's a very different portfolio because we don't have that 40% of Roper that was projects and cyclicality back to 2018. So that, so now you don't have the situation where you might have something that grows 15% one-year and then goes down 15% the next year. So really the whole portfolio is sort of plus or minus mid-single digit organic and in a bad year something might be up 2% or 3% and in a great year it could certainly be double digits. And I'll let Neil expand on that.

[Neil Hunn:]

Yes. What I would maybe add three points to that, Joe. One is it's, when you look at the 27 companies it's a very tight distribution in terms of the growth rate. There's not – it's not a bar bill where you got 10 companies growing 2% and 10 companies growing 15% of averages into something different. It's a very tight, I think the only two acquisitions we've done, we've announced as a high-single digit organic growth business. Everything else has been mid-singles and we're working to improve that. So as a general matter, think of it as a mid-single digit through cycle organic growth portfolio that is – has all the casual characteristics you'd want to see with that. We'd see operating leverage occur, so that's going to translate to a little bit more cash growth organically. And then you got to layer on top of that the M&A flywheel. So we feel very comfortable. We have a mid-teen sort of cash flow compounding growth algorithm that's embedded in our strategy.

[Joe Ritchie:]

Got it. That's super helpful. And then I guess my following question, I hadn't historically thought of you guys as being potentially a big beneficiary of some of the stimulus packages that have been passed. And so as an example, like the K-12 education stimulus funding but then as you're talking about seaboard and now there's this, this acquisition with Frontline, I'm just wondering like, do you guys see yourselves as a beneficiary of some of these stimulus measures where we actually haven't seen a lot of that spending yet come through and perhaps we'll start to see some of that in 2023?

[Neil Hunn:]

We think the answer is no. We're not in any meaningful way or even in a minor way a beneficiary of the stimulus or COVID funds. For instance, with Frontline we studied that extensively during a diligence process and while the K-12 districts certainly on-boarded stimulus and COVID dollars, the vast, vast majority of those funds, the one-time funds were spent on one-time type items principally getting for instance student to device ratios to one-to-one for instance. They were districts were super hesitant to buy a recurring software package with one-time money. So Frontline we don't believe in any meaningful way was a beneficiary that we think that's a good thing goes to the durability of the growth drivers of the business. Seaboard, same thing, there's what Seaboard does, I mean it's about food and management for these K-12 and higher Ed facilities and at campuses as well as access management and integrated security and they have not been a meaningful beneficiary. So no is a short answer.

[Operator:]

Thank you. And our next question today comes from Brendan Luecke with Alliance Bernstein. Please go ahead.

[Brendan Luecke:]

Good morning, all. Thanks for taking my question. A few quick ones on the M&A environment. So you have been – you haven't been shy in the path levering up for big deals. Has your target leverage ratio changed all with the higher rate environment?

[Neil Hunn:]

No. The leverage ratio is completely independent of the rate environment.

[Brendan Luecke:]

Okay, great. And then it within a higher rate environment, do you feel you have an advantage over PE funds, particularly with the IPO market dried up?

[Rob Crisci:]

We've long said that higher interest rates are, we believe are a – we're a benefactor of that. 70% for the reasons that 70% to 80% of our capital that we deploy is from our internally generated cash flow. Obviously 20% to 30% is from the balance sheet. So we're versus private equity who are competing against 50-plus percent of what they deploy in may be every deal is variable rate debt at the moment. So they are much more indexed and their values are much more indexed to shorter term rates than anything that we would see.

[Neil Hunn:]

And very high yield...

[Rob Crisci:]

…and very high yield.

[Neil Hunn:]

And that those markets have been closed.

[Rob Crisci:]

So we think we're beneficiaries in a higher rate environment because one would think over time, if these rates are sustained and that's a big, if they're sustained, then you'd see valuations adjust accordingly, and so we think that's our view on that. We've been very consistent of that view for a long time.

[Operator:]

Thank you. And our next question today comes from Alex Blanton at Clear Harbor Asset Management. Please go ahead.

[Alex Blanton:]

Good morning. Monitoring around my second question, would you wait until I say thank you before you cut off my mic please?

[Zack Moxcey:]

Yes, sir no problem.

[Alex Blanton:]

The first question is in the tech enabled segment you had a 15% growth. What portion of that was just due to supply chain catch catching up on things that had been delayed because of the supply chain?

[Rob Crisci:]

Alex, that's a hard one to give you a level precision. I will tell you we did better in the quarter because the supply chain got better. I mean, Verathon had a lot of things that had to go exactly right and they – most reverse what they did. Neptune did a nice job as well. Northern Digital did a great job. So a chunk of the beat would certainly be attributed to that.

[Alex Blanton:]

Yes. Okay. And secondly on the acquisition front in the past when you've made a big acquisition like this, you've had a pause in your acquisition pace until you transition into the new company and get things squared away. What do you expect to do this time? You have $4 billion in dried powder. Would you expect to use some of that or a lot of that or a little of that in the coming year?

[Rob Crisci:]

Yes, Alex so there's certainly no need for a pause to deliver because our leverage rates are still relatively low because we are benefiting from the fact that we did these divestitures and we're still really redeploying those proceeds in addition to our normal cadence. So really no reason to pause. So we're very active in the M&A markets. Today we'll remain active. We might do deals very soon. It might take us a couple quarters as Neil mentioned, we're going to be very, very patient. But we're certainly going to remain active and there's not going to be any sort of a pause in that activity. Like you've seen after some of the larger deals where we did lever up and we're in a situation where we sort of had to take some time to reduce the leverage.

[Alex Blanton:]

And there's a good backlog of companies to supply that you're looking at?

[Neil Hunn:]

Yes. The market is, the number of deals then and processes that are in slide are quite large, yes.

[Alex Blanton:]

Okay. Thank you.

[Neil Hunn:]

You're welcome. Thanks Alex.

[Operator:]

This concludes our question-and-answer session. We will now turn back to Zack Moxcey for any closing remark.

[Zack Moxcey:]

Thank you everyone for joining us today. We look forward to speaking with you during our next earnings call.

[Operator:]

Thank you. The conference is now concluded and we thank you all for attending today's presentation. You may not expect your lines and have a wonderful day.